Hidden Costs in the Transportation Back Office
With increased focus on the back office, transportation companies are now beginning to recognize a variety of hidden costs and problems.
Traditionally, the back office has remained in the background with little to no attention from company leadership. Let’s face it; payables, billing, and document management just aren’t sexy. But the back office contains hidden costs that are sand in the gears for transportation companies.
Let’s take one specific area — payables auditing for freight brokers and 3PLs — to better understand the costs and opportunities.
Labor is the most visible back-office cost. Take the cost of your payables staff and divide by the number of loads. Simple. Now, be sure that cost includes health insurance, taxes, and benefits. And don’t forget to include part-time team members that touch payables. Does carrier relations get involved in managing exceptions? How much time do your company’s brokers and agents spend on payables? Does finance get involved when a carrier payment gets misrouted? How much time does your IT department spend updating document storage capabilities?
Let’s take a freight broker that spends just $3 per load on stuff like this. Doesn’t seem like much. But a $1000 shipment with a 15% gross margin and 4% net margin drops just $40 to the bottom line. That $3 — spent just on the payables process — eats up 8% of total profits.
Hiring back-office staff is an easily overlooked cost. These staffers are not the most expensive employees in your company, but they’re responsible for getting the money right — ensuring correct payments and accurate customer invoices — day in and day out. With the number of special rules for different customers and carriers and shipments, these individuals require superb attention to detail. If you’re growing your business (or experiencing staff turnover), you know how hard it is to find and train payables staff.
Accuracy, or lack thereof, is a friction that can put a broker’s carrier and customer relationships at risk. Incorrect customer invoices that require re-bills or “ad-bills” can impact the brand as much as late deliveries. Slow or incorrect payments to carriers make you a less attractive partner. And most companies can’t even track the frequency of these occurrences.
Risk is one of the most difficult costs to assess because it involves assigning probabilities to future events. What’s the risk of unexpected turnover that leaves you unable to pay and invoice on time? The risk of diverted funds in a back office with insufficient controls? Or simply the risk of a freight recession with a high fixed cost labor model?
Cash (flow) is king, but many freight brokers don’t treat it that way. When carrier paperwork gets delayed by a week, that also delays customer invoicing by a week. So even though you’re paying carriers according to terms, customer payments come in slower. The cost of financing that same $1000 shipment for 7 days at a 5% cost of money is another $1.
Information may be the most important issue of all. In a manual environment, companies simply don’t have the information they need to track costs, monitor KPIs, manage employee performance, or assess the soft costs associated with different customers and carriers. And providing timely, on-line documentation to customers and carriers is even more problematic. Business is moving faster and faster — without information, companies are flying blind.
More and more, we’re seeing transportation companies, especially the ones focused on growth, prioritizing the back office. Automation reduces cost, speeds work, and improves cash flow, with the additional benefit of variabilizing fixed costs. Digitization increases accuracy and access to information. Instead of scrambling to hire the next payables clerk, these companies are deploying their best people to the most interesting work and figuring out how to grow their business.
In the low-margin, high-transaction world of freight logistics, wringing out the hidden costs in the back office has now become a critical necessity.